29 April 2016 by pdonnat

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AK Steel Holding Corporation is issuing 52M shares, 25% of its market capitalization, to repay its outstanding borrowing under its asset-based revolver facility. While its 2020 bond was trading at 35 cents on the dollar in January, it is now trading close to 90 cents. With iron ore up more than 50% this year, with Donald Trump and Hilary Clinton critical of China’s trade practices, equity investors are viewing the AK Steel stock as a call on the US steel recovery. The credit was quick to catch up and the move has been impressive. According to the Grapple, the market default probability within 5 years was close to be certain 4 months ago at 90%. The market is tonight “only” pricing a 45% probability of default over the next 5 years. United States Steel Corporation had the same trajectory this year, from 90% to 40%. Distress credits can offer a lot of convexity to investors, and positive convexity for once.